Last Thursday, Facebook did its first earnings call as a public company. Though it showed a solid 32 percent revenue growth to $1.2 billion, reactions were mixed at best and the stock suffered. Unrealistic expectations are causing people to overlook Facebook’s fitful progress in online advertising, and signs that it really does have a clue in mobile.

Here are the important takeaways from the call. Executive commentary is taken from the transcript.

Its business model appears solid. Advertising sales were up 28 percent to $992 million. Observers seemed far more disappointed by slowing revenue growth than by Facebook’s loss, that was driven by $1.3 billion in stock-based compensation expenses from its IPO. Excluding that, the company showed a healthy 43 percent operating margin, and would have had a $515 million operating profit.

With 955 million active monthly users, Facebook’s user base is huge and growth is naturally slowing. Still, Facebook claimed that the number of monthly users even in the mature U.S. market was up versus the last quarter, and that it detected no slowdown in activity, even among younger users. So much for the “fad” fading.

Its role in online advertising is expanding. Before and during the call, Facebook has been trying to illustrate that its social media advertising platform can be effective for marketers, even as it remains cautious in its deployment of ad formats. The company is paying to do the necessary research to show off its advertising ROI, and it is poised to gain significant share even without making much of a dent in brand advertising. Home-grown display ad revenue from the big three portals – Yahoo, MSN and AOL – was flat or down this quarter. Facebook is the only big player growing sales of display ads it sells on its own site; the portals and Google are growing via ad networks.

Facebook attributed its ad revenue growth to an 18 percent increase in the number of ads delivered and, more important in the long run, a 9 percent hike in price per ad sold. It boosted the number of ads shown per page, but that effect was muted by mobile usage. In fact, the number of ads shown in the U.S. actually declined two percent. Facebook managed to counter that by being able to charge even more in the U.S. with its Sponsored Stories social units that show in the news feed. U.S. CPMs were up over 20 percent. That U.S. figure is quite promising for future Facebook growth.

It’s starting to monetize mobile. Half of Facebook’s monthly active users came from mobile devices. CEO Mark Zuckerberg said mobile users were 20 percent more likely to use Facebook on a daily basis than web users. He said that by the end of June, Sponsored Stories were generating $1 million in sales a day, half mobile. At that rate, it won’t take long for Facebook to be a leading player in mobile advertising. Of course, that’s an easy thing to say, as it only takes $100 million a year to be a “leading player.” Google is the only company with a billion-dollar mobile ad business yet.

Facebook blamed relatively flat sequential growth in fees revenue to mobile gaming, where most social games don’t use its payment system. It’s an open question whether Facebook can take its payment system beyond its site. But it sounds like it won’t be using a Facebook phone to do so. In response to a question about integrated mobile devices versus apps, Zuckerberg said, according to the transcript, “There are lots of things that you can build in other operating systems as well that aren’t really like building out a whole phone, which I think wouldn’t really make much sense for us to do.”

Facebook’s near-term success depends on how it works the following:

Ecosystem mining. Zuckerberg hinted that Facebook wouldn’t take as big a cut – in terms of ad spending as well as its 30 percent fee on virtual goods – from other businesses that use its platform as it does from social gaming. That’s not just a mobile issue: he specifically mentioned web-based music and e-commerce.

Mobile substitution. Facebook said daily web usage in the U.S. declined relative to mobile. To-date, mobile usage has been incremental to more ad-friendly web usage. Google is worried about mobile search ad CPC. But while Facebook’s mobile ads look relatively cheap, it’s demonstrating that in-stream ads can carry a premium over other formats.

The victim of expectations, Facebook’s IPO and public market performance is a wet blanket on consumer and social media startups. But Facebook itself is building what looks like a sustainable business with the potential to accelerate its growth engine in the next 12 to 18 months.

Microsoft’s struggles to make a successful business out of advertising led to the company posting its first-ever quarterly loss. The main culprit was a $6.2 billion write-down of the goodwill associated the 2007 acquisition of aQuantive – a company that combined advertising technologies, networks and an agency business. But Microsoft’s continuing losses in its search and ad-driven Online Business division didn’t help. Some have been saying for years Microsoft should never have gotten into media. Is it about to get out?

Microsoft is sending signals that it might be about to dramatically restructure its ad-based businesses:

In the past, I’ve tried to make the case for why Microsoft needs to have an advertising and search business. But I’m beginning to have my doubts, and my argument was always stronger for search. Search is technology- and scale-driven, is a core navigation/UI mechanism that threatens Microsoft’s Windows and browser franchises and is the unchallenged cash cow that powers Microsoft’s chief technology platform rival, Google.

A competitive search offering could fuel a display advertising business with user intention data valuable for re-targeting and advertising attribution analysis, two key factors in raising display ad CPMs. Years ago, Microsoft was an early leader in advertising yield management (acquiring Rapt Inc. in 2008) and attribution analysis. Advertising complements Microsoft’s digital living room and mobile efforts. And many consumer app and cloud businesses are paid for via a combination of advertising and fees, even if the idea of B2B marketplaces with advertising as one of the exchange currencies never caught on.

But Microsoft’s recent big acquisitions – Skype and Yammer – may employ freemium business models, but they don’t depend on advertising. They’re far closer to traditional Microsoft strengths in unified communications and enterprise software. Other social media acquisitions by enterprise software firms, like Salseforce.com and Oracle, display much more of a marketing focus than Microsoft’s.

Here are potential scenarios for Microsoft’s advertising and media business:

Stay the current course. Keep investing in MSN and Bing, build out ad networks and exchanges with other portal partners like Yahoo and AOL. Jump hard on local and mobile and buy a Yellow Pages company if that’s what it takes. Odds: 3:1.

Pick a spot. Focus on one or two core advertising businesses, but de-emphasize the others and stop hoping for synergies. Pick only 2 of the following: Bing, MSN, targeting/hosting technology, ad neworks/exchanges, MSN, local/mobile. Odds 5:2.

Unload the media business. At the risk of being the boy who cried wolf, I could see Microsoft keeping search technology, but spinning off MSN and Bing to a joint venture with Yahoo, perhaps with AOL in the mix. Odds 2:1.

Some hybrid of the second and third scenarios is looking increasingly likely.

A few weeks ago at GigaOM’s Structure event, we hosted a Mapping Session to sketch out the implications of Infrastructure as a Service’s impact on the enterprise data center value chain. We asked about 40 GigaOM Pro subscribers to join in an interactive discussion with a panel of analysts to assess how far and how fast IaaS would commoditize storage and networking hardware, and the management software that runs it.

Our Mapping Sessions often comprise the first stage in our process for developing research that we present as a Sector RoadMap report or other ecosystem analysis. In a Mapping Session we aim to tap the collective wisdom of our analysts and other thought leaders in the market sector we are researching, to identify the most disruptive trends and their relative importance in shaping a market or industry over the next 12-24 months. We also want to examine which companies are in the best and worst position to ride or drive these trends – we call them “Disruption Vectors” – to gains in market share and revenue.

In this Mapping Session, “The IaaS endgame: commoditizing the data center,” participants decided that computer hardware technology disruptions were so far advanced as to no longer be Disruption Vectors that smart companies could leverage. The collective intelligence present at the session determined that advances in CPU core density, or the impact of Facebook’s open compute standards, were pretty well understood and not big opportunities for vendors. Server gross margins have been commoditized into the single digits, but for the moment shared storage in the form of NAS and SANs are still in the 50 percent to 60 percent range. Routing and switching hardware hovers near 70 percent.

Session participants settled on three critical Disruption Vectors:

Storage commoditization. Plunging flash memory costs plus virtualization software will drive the margins out of big storage first. Network-attached storage (like NetApp) is already becoming a commodity server running as the storage controller connected to an array of disks. However, the storage software isn’t yet able to span controller/arrays from multiple vendors. Storage area networks are on a slower commoditization pace. SANs are typically engineered for extreme performance and fault tolerance.

Network switch commoditization and SDN. Networks from Cisco, Juniper, Arista, and Nicira are heading towards commoditization almost as rapidly as storage, with software-defined networks running switching and routing intelligence in software atop commodity servers and storage is also on the path to commoditization. Though controller software can run on commodity servers, the admin tools don’t interoperate that well. That implies single-vendor networks for a while, where the vendor has pricing power, even if it’s built on commodity hardware.

Open source impact. Many critical cloud-computing technologies had open source origins. Panelists and audience participants expect the open source world will continue to power innovation, and likely spawn management software and new tools for things like workload migration. However, open source is still no defense against supplier lock-in.

Three less influential Disruption Vectors were:

Management/orchestration tools. More means to the end of data center commoditization via IaaS. With the interoperability potential to break down some of the aforementioned lock-in and pricing control.

Packaged software business models. Most IT departments don’t have the experience to create and manage a software business the way packaged software or IaaS companies do. That’s a potential opportunity for systems integrators and other service providers.

Service provider-scale data centers may have highly optimized modules at a completely different scale than those suitable for enterprise data centers. 40-foot containers may come in several options. One may be configured with the highest performance, highest availability SAN storage. Another container may be configured to have the highest performance routing in order to introduce the minimal possible latency into a mobile app.

Custom collections of modules are generally low-margin, highly commoditized products that lend themselves to very specific use cases. Highly integrated containers can be assembled to add huge amounts of specific types of capacity in order to stand up new data centers very quickly. These containers are likely to support higher gross margins than their off-the-shelf rack or blade brethren. Specialized module configurations will emerge for specific types of computing tasks like transaction processing or high-performance computing in support of scientific or graphical applications.

EMC wants to ensure if damage is done, it does it to itself. It announced a reorganization of its PaaS and SaaS businesses shortly after our session, partly for focus, partly for a shot at new opportunities, and partly to separate businesses with fundamentally different pricing models that drive their valuations.

IaaS providers are moving up into the PaaS space, and PaaS players have their eyes on the applications layer provided by SaaS. But those are tales for another set of Sector RoadMaps.

Other implications

Enterprises will be able to share or rent out their own data center in IaaS-enabled marketplaces, but that will play out beyond the 36-month horizon.

While cloud-based data centers enabled by IaaS are viable in countries with robust high-speed network availability, that is not the case in many regions of the world. Data center commoditization will thus develop at different rates, depending on regional infrastructure maturity.

Feedback

We welcome your feedback on these disruptive trends. Have we missed or mis-emphasized anything that you believe will be key to shaping data center commoditization over the next two years? Continue the discussion by leaving a comment below.

Kayak’s would be the first consumer Internet offering after Facebook’s, and the world wonders what it will take to take to remove that somewhat bitter aftertaste. Facebook raised $16 billion and kept tight control of the company, but priced the offering so close to demand that it failed to “pop” on opening day, and the stock has been sluggish ever since.

Kayak is something of a “traditional” consumer web play based on search, e-commerce, price transparency and consumer choice. Kayak isn’t riding any of the biggest buzz trends – cloud computing, big data or social media – and another, mobile, may be some cause for alarm. Consider:

Data. Kayak depends on real-time access to data about inventory, pricing, etc., but not in the unstructured formats that characterize big data analytics. The reason Kayak delayed its IPO for nearly two years was because it was fighting Google’s acquisition of ITA, the source of the bulk of Kayak’s airfare info. As part of a consent decree to enable the acquisition, Google’s ITA contract with Kayak can extend into 2016. But Google is building out its own vertical travel site.

Mobile. Kayak says its mobile application has been downloaded 15 million times and that mobile users generated 17 percent of Kayak’s travel queries in the first quarter of 2012. But Kayak – like Facebook and Google – is a little nervous about its ability to monetize mobile activity. It estimates that mobile queries only generated 2 percent of Q1 revenue.

Hints of vertical search success

Kayak is one of the few examples of a vertical search business outside of retail. Amazon, Best Buy and others use search technology effectively on their own shopping sites, but few companies have made a go of a standalone, specialized search site. Although Kayak does enable hotel booking on its site, most of its revenue comes not from direct transactions but from bounties paid by travel sites it sends traffic to, and from advertising. Kayak had $225 million in sales in 2011, up 32 percent from $171 in 2010. It showed an operating profit of $15 million. Kayak’s growth rate increased in Q1 to 39 percent, and the company said it expected the June quarter to show revenue of about $75 to $76 million, up 31 to 34 percent from a year ago.

Those are solid if not spectacular numbers for an ageing startup in a market that’s probably already seen its big disruptions. Search engines and the first wave of online travel agencies rocked the travel industry when they exposed airline pricing and availability and put control in the hands of consumers, wiping out huge swaths of the off-line agency business. Kayak continues to fuel those online agencies, perhaps at the expense of revenue diversification. During Q1, 63 percent of its total revenue came from Kayak’s top ten travel suppliers and online travel agencies. Expedia alone accounted for 23 percent, while Priceline and Orbitz produced another 10 percent each.

So Kayak has begun to make the case that standalone vertical search can work, at least as long as it can add differentiation to the search experience through its speedy and efficient user interface. Unlike a lot of sites in the e-commerce ecosystem, Kayak doesn’t depend heavily on Google for traffic. According to its S-1a, 75 percent of Kayak’s query volume originates from people who directly visited its site or mobile apps, and only 10 percent from general search engines.

Kayak has to pay for that awareness. The company spent $58 million on brand advertising (including TV and billboards) in 2011 and a whopping $21 million in the first quarter of 2012. It expects to invest at this level or higher for the foreseeable future. And online marketing expenses – including money it spends on Google search keywords or contextual advertising – increased even faster, at over 60 percent to $18.5 million in Q1. But even with these expenses, Kayak’s margins are holding up.

Can Kayak continue to thrive in the face of general search and Google’s own vertical search efforts? Well, in 2008 Microsoft acquired Kayak competitor Farecast, and subsequently launched Bing Travel. But since 2011, Kayak has had a co-branded, revenue-sharing partnership with Bing Travel. If Kayak can continue to differentiate, maintain customer loyalty, and ride its partners, it should continue to show steady growth.

Neither company has really broken open the social-media advertising piggybank. Facebook has a $3 billion ad business, but it’s built off of vast amounts of inventory that direct marketers and Facebook apps vendors use to drive traffic cheaply, if relatively ineffectively. Facebook’s ad business has attracted public scorn way out of proportion to its profitability. In contrast, as a private company, no one really knows how big Twitter’s ad revenue is, and it may be getting outsize praise. Market research firm eMarketer pegs Twitter at $140 million in ad sales in 2011, but don’t forget that eMarketer’s estimates of Facebook before it showed its S-1 were off by hundreds of millions of dollars.

The reality is currently between those extremes. Brand marketers and agencies I’ve worked with would love to exploit social media into something better than banner ads, or even video messages. I’ve described how Facebook could cash in faster by expanding its ad formats and buying options without risking clutter or user revolt. But brand advertisers are not moving their TV budgets without more proof of Facebook’s ability to increase awareness, consideration and off-line conversion, or deliver audience-buying efficiency.

I expect Facebook data on its users’ interests will ultimately prove valuable for ad and offer targeting on its own inventory and through a potential ad network. But Facebook is applying that data conservatively so far. It will be able to raise its direct marketing pricing a bit by encouraging re-targeting through a so-called exchange. But at least for now, it won’t allow buyers to mingle its proprietary user data with third-party data.

Pinning false hopes on mobile?

At the same time, social media observers are giving Twitter way more credit for cracking open mobile advertising than it deserves. Partly that’s because Facebook has raised so many of its own warning flags about mobile monetization. Facebook sponsored stories – one of its ad formats that actually makes use of the “social” in social networking by showing connections between “friends” and products – will soon show up in users’ mobile feeds. Twitter may claim that over half its ad revenue on some days comes from mobile, but as noted, its ad revenue is pretty small. Google already has a billion-dollar mobile ad business, originating more from search than from display ads. At $100 million, Pandora’s personalized radio streams may be the second biggest source of mobile ad revenue.

Jean-Louis Gassée’s bearishness about mobile advertising, social or otherwise, may be close to the truth. He thinks the mobile medium is particularly unsuited to advertising. That’s an argument one could make about communications-driven social networking, too. Call me a skeptical believer in both. Both web-based and mobile social media will force the invention of new formats for advertising and marketing before they produce really big revenues. They’ll need to exploit targeting via interest graph, tap into viral word-of-mouth and, perhaps hardest of all, achieve scale. They’ll look like sponsorships and coupons before they look like TV advertising.

Question of the week

This year’s patriotic plug. I read this 1944 Newbery Medal winner in the very early ’70s. I loved it back then – ignore the obvious Amazon spam reviews. I was, perhaps, overly obsessed with Johnny’s sliversmith-induced wound. And no, it’s not about noble Virginians, but rather those radical New Englanders. Heck, I went to college up North.

Happy Fourth. Throw another hot dog on the grill for me. As always, I’ll bring Mom’s potato salad (never tastes the same twice, but always good).

It’s been less than nine months since Zynga started to hint at the strategy that would launch its next stage of growth and reduce some of its dependency on Facebook. Last October Zynga began to talk about its grand vision of “Project Z” and “Zynga Direct,” and, in fact, the company is showing steady progress in implementing that vision. Third-party developers and Zynga competitors would be wise not to discount Zynga’s momentum. Last week, Zynga discussed its:

zCloud infrastructure. Zynga has built its own truly scalable infrastructure that it invites third-party game studios to use, both for core technologies and cross-title promotions. Zynga teased the idea of a new API for more backend services to come.

New titles. Zynga expanded its own portfolio of games across a handful of genres. There weren’t any obvious blockbusters, but Zynga showed a teaser trailer for a much-enhanced Farmville 2.

Adding growth opportunities

Together, these initiatives show how Zynga is slowly but surely building out its business and adding growth opportunities. It’s still tightly wedded to Facebook for audience growth and payments infrastructure. But it has started to show traffic growth on Zynga.com. More important, Zynga is trying to ensure that it doesn’t have to count on Facebook as a mobile distribution platform. That’s a good thing, as most observers, including Facebook itself, see mobile as one of the social network’s biggest challenges.

Like most entertainment businesses, social games are driven by hits. By becoming a distributor and publisher of games from other studios, Zynga can flesh out its portfolio with potential big hits. It’s nearly impossible to predict blockbusters; disciplined companies manage a portfolio and franchise the winners. Franchise-related merchandise will likely pay off better than TV spinoffs.

Zynga is actually more like a TV network than a TV studio, though the analogy of fine-tuning titles rather than depending on opening weekend blowouts is apt. Like Zynga, the big broadcast networks have “owned and operated” studios and stations, with affiliates to expand distribution. Zynga hasn’t gotten that reciprocal distribution yet. And another thing it hasn’t pulled off – that the networks excel at – is to sell advertising effectively. In fact, Zynga is actually showing on its web games some ads that were sold by Facebook – the first hint of a Facebook ad network everyone has been expecting. Right now, Zynga’s not being aggressive in building out an ad platform (richer formats, sponsorships, targeting), but it could do so, or acquire some key parts. That’s more likely than Zynga getting into gambling, with all its regulatory headaches.

Question of the week

Where are Zynga’s best growth opportunities?

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This is David Card's personal blog. I get paid to think about the intersection of media, technology and consumer behavior. Fun, huh?